Benefits of investing in tax saving fixed deposits

If you have not made any tax-saving investments yet and are looking for a safe and easy bet for saving tax then a tax-saving fixed deposit could be an option.

Tax-saving FD is one of the tax saving instruments where one can invest to save tax under section 80C of the Income Tax Act. However, do keep in mind that from FY 2020-21, an individual can continue with the old/existing tax regime by availing of existing deductions and tax exemptions. He/she also has the option to opt for the new, concessional tax regime without claiming any deductions and tax exemptions. The tax benefits one forgoes by opting for the new tax regime include deductions under: section 80C for a maximum of Rs 1.5 lakh claimed by investing in specified financial products, section 80D for health insurance premium paid, 80TTA for deduction on savings account interest earned from a bank or post office, etc.

Now, one can invest in this FD easily by visiting a bank, filling the form and giving a cheque. In fact, if you can place the FD in the same bank branch on which you are drawing the cheque then the transfer of funds can happen quickly and the investment can be done within a few hours.

As the transfer of funds would be between accounts in the same bank branch, it can be done within say, 20 minutes (depending on bank staff's efficiency) and you could walk out with your FD receipt within half an hour. Some banks even allow investing in tax-saving FD via their Net-banking facility provided you have access to it and are comfortable using it.

Also Read: Top 5 tax-saving bank FD

Tax saving FD being a debt investment is safer than equity-based tax saving avenues such as ELSS schemes. Returns on a tax saving FD are also guaranteed contractually by the lender (the bank or post office) and fixed for the term of the FD.

Among debt investments offering the section 80C tax benefit, this is one with the smallest lock in period of 5 years and offering a periodic interest pay out option. Five-year NSCs also offer Section 80C tax benefit but are cumulative instruments and do not offer periodic interest pay outs. Consequently, among debt investments tax saving FDs are a comparatively more liquid, safe and easy option.


Also Read: Bank FD vs NSC: Which is a better tax-saving option?

At present, among the banks that offers the highest interest rate on tax-saving FDs are DCB Bank (6.75 per cent), AU Small Finance Bank (6.5 per cent), and Equitas Small Finance Bank (6.4 per cent). 5 year post office time deposit is currently offering 6.7 per cent.

Here are the few points to note while making the investment in Tax- Saving FD:

• Only Individuals and HUFs can invest in tax saving fixed deposit(FD) scheme. A minor can also invest jointly with an adult.
• The FD can be placed with a minimum amount which varies from bank to bank. The maximum amount is of course Rs 1.5 lakh in the financial year which is the ceiling for tax saving investment under section 80C of the income tax Act.
• These deposits have a lock-in period of 5 years. Premature withdrawals and loan against these FD's are not allowed.
• A person can invest in these FD's through any public or private sector bank except for co-operative and rural banks.
• Investment in Post Office Time Deposit of 5 years also qualifies for deduction under section 80 (C) of the Income Tax Act, 1961.
• Post Office Fixed deposit can be transferred from one Post office to another.
• One can hold these FD's either in 'Single' or 'Joint' mode of holding. In the case the mode of holding is joint, the tax benefit is available only to the first holder.
• The interest earned is taxable as per the investor's tax bracket and therefore, TDS is applicable. The interest on deposits is payable on either monthly/quarterly basis or it can be reinvested. A person can avoid TDS on the interest earned by submitting Form 15G (or Form 15H for senior citizens) to the bank. For individuals, TDS will be applicable if total interest received exceeds Rs 40,000 in a financial year with no change in the taxation of interest income. Senior citizens, under section 80TTB, can claim a deduction up to Rs 50,000 on the interest earned from deposits. Click to know how senior citizens can claim deduction of Rs 50000.
• Nomination facility is available for these FDs. However, no nomination facility is available in case the deposit is applied for and held by or on behalf of a minor.
• Most banks offer slightly higher interest rates on FDs to senior citizens (as compared to the interest rate offered on the same FD to a non-senior citizen). This interest rate differential exists for tax saving FDs also. However, the post office does not offer higher interest rates to senior citizens.